What are unsecured loans?
Pros and cons of unsecured loans
- You can access funds faster. Since it's often possible to obtain an unsecured loan with just a signature and a quick look at your credit report and assets, you’ll usually be able to access your money faster than you would with another type of loan.
- Borrowers with good credit can get competitive rates. As far as loan rates are concerned, personal loans are a fairly affordable option. According to the most recent data from the Federal Reserve, the average interest rate on a personal loan is currently 9.58%. If you were to borrow the same amount on one of your credit cards, you’d pay 14.61% in interest, on average.
- No collateral is needed. Since there is no physical asset being put up as collateral for your loan, if you are unable to keep up with your loan payment, nothing will be repossessed. That said, missing a payment or paying late will hurt your credit profile.
- You may face stricter qualifying standards than you would with a secured loan. Since the lender has less recourse with an unsecured loan, they often impose stricter qualifying standards to maximize their chances of being repaid. With that said, qualifying is likely going to be largely based on credit approval, your income, and your debt-to-income ratio.
- Those with lower credit scores may face less favorable loan terms. If your FICO score could use some work, you may be given less favorable repayment terms than someone with a cleaner credit history. In particular, you may be given a higher interest rate and a lower borrowing limit.
Loan terms to consider when shopping for an unsecured loan
- Loan amount: As mentioned above, different loan options may come with different borrowing limits. You’ll want to ensure that the loan amount on your quote is enough to cover your expense.
- Interest rate: The interest rate is a charge passed on to you in exchange for the privilege of borrowing money. In addition to shopping around for the lowest rates, you should determine whether you’re being offered a fixed interest rate, which stays the same for the life of the loan, or an adjustable interest rate, which can change from month to month.
- Annual percentage rate (APR): Where unsecured loans are concerned, the APR combines the interest rate and any fees associated with the loan. For example, if your loan comes with an origination fee, which many lenders charge in exchange for facilitating the borrowing process, that will be included in the annual percentage rate.
- Fees: Additionally, you should also verify if there are any conditional fees associated with your loans, such as late fees or a prepayment penalty.
- Available discounts: Lastly, always be sure to ask about any available discounts. For instance, some lenders will offer an autopay discount if you allow the lender to automatically charge your account each month.
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